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. Last Updated: 07/27/2016

Ignatyev Says Banks' Stability at Risk

Russia faces the risk of a new wave of instability that may be linked to the nonpayment of loans to commercial lenders, Central Bank Chairman Sergei Ignatyev said Friday.

The country's 1,000-plus banking system was severely hit by the stock market collapse in September, and the quality of loan portfolios has been deteriorating since then as the economy faces a contraction for the first time in a decade.

"In principle, risks [of a new wave of instability] exist, and they are linked to the growth of unpaid loans to commercial banks," Ignatyev told the State Duma. "We should be ready for such a turn of events and for the additional capitalization of some banks."

The government plans to inject 900 billion rubles ($25.2 billion) into commercial banks' capital as rising provisions and bad loans diminish their profits and put their capital adequacy ratio under pressure. The government has said banks drawing money from state funds should channel resources into the real economy.

First Deputy Prime Minister Igor Shuvalov said Friday that the government has ordered state-controlled banks to raise loan portfolios by at least 2 percent per month.

His spokesman later said the directive concerned loans to "small and medium companies."

Olga Veselova, an analyst at Troika Dialog, said state-controlled VTB was fully capable of increasing its portfolio of loans to small and medium-sized companies by 27 percent in 2009.

"It is important to understand whether the directive is a strict order or just a wish. After all, banks are business-driven, and there are shareholders apart from the state," she said.

State-controlled banks have been the main recipients of government funding. Sberbank received a 500 billion ruble subordinated loan from the Central Bank last year and will likely get the same cash injection later in 2009.

The Central Bank said earlier that it was expecting the share of nonperforming loans in commercial banks' portfolios to rise to between 4 percent and 4.5 percent in the first quarter of 2009, up from 3.8 percent as of Jan. 1.

Banks' profitability has been under pressure as they have to raise provisions and write down dead debts. The Central Bank expects loan provisions to rise to between 5.5 percent and 6 percent by April 1, from 4.9 percent to 5 percent as of Jan. 1.

nIgnatyev also said Friday that Russia had fully exited its holdings of U.S. mortgage agency debt, which it had held as part of its gold and foreign exchange reserves.

As of Nov. 1, Russia held Fannie Mae and Freddie Mac bonds worth $20.9 billion. At the start of 2008, it held $65.6 billion worth, with most of it due to mature during the year.

"We sold it all, there is nothing left," he said. "We made a good profit."

The agencies, hurt by rising delinquencies and falling securities values, were seized by the U.S. government in September.